Since the Pakistan-China FTA was penned in 2006; Chinese imports have been accused of hurting local industries. However, to date, there is no empirical study that conclusively connects Chinese imports to the decline in the Pakistani manufacturing sector.
A State Bank of Pakistan (SBP) study titled “Dynamics of Pakistan’s Trade Balance with China” argues that based on anecdotal evidence, the influx of cheap imports from China might have had adverse effects on the domestic manufacturing sector. These manufacturing product lines include ceramics, machinery, chipboard, sewing machines, TV sets, electric meters and transformers, electronics, plywood, bicycles, etc. The study cites data from Pakistan Bureau of Statistics (PBS) that shows production had declined in many of these industries since 2006.
While it is true that imports from China for products such as transformers, motors, and sewing machines have increased over the past decade, whether these imports single-handedly contributed to the fall in production is difficult to ascertain in absence of empirical data.
And even if that were the case, there are a myriad of issues ailing the small and medium manufacturers in this country that have hampered manufacturing. There is little R&D and technological intervention in these sectors; access to finance is expensive especially for long-term credit to upgrade and expand.
Meanwhile, energy related issues add to the already high cost of production and doing business. If Chinese imports were able to hurt local manufacturers, it is because they enjoy economies of scale to be cheap and Pakistan on the other hand, has ignored the need to promote their manufacturing industries.
It is true that Pakistan maintains a very high trade deficit with China which has ballooned post-FTA, but the majority of imports from China have actually helped boost the economy. Imports are largely in the capital goods category where cheap machinery and technology is imported to help local industries upgrade their facilities or expand their capabilities; or in the input or the raw material categories. The latest machinery imports are mainly energy related technology needed for the power projects under CPEC.
The point is to not celebrate the FTA or Chinese imports but to reach the root of the problem. There is no doubt that Pakistani exports did not see a profound boost during the course of the FTA and in part, it was because of the poor preparation of the Pakistani side to seek the right concessions. But ultimately, the poor preparation extends to the fact that Pakistan does not know how to export, despite market access.
There isn’t a long term policy in place that helps manufacturers get cheaper financing, produce the goods at lower costs, gain ability to establish linkages and global value chains, add value to existing goods in order for them to be competitive in the global marketplace and negotiate FTAs.
The best way to protect local industries is to help them gain economies of scale and become competitive, and if that means limiting imports for a period of time, then so be it. But Chinese imports must not scare Pakistan. There are rounds of new trade deals with different countries around the corner, but without a roadmap in sight, these deals like so many in the past are destined to fail.
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